End Game – Turning New Money into Old

Whether they weekend in Whistler or let go in Lake of the Woods, nibbling Yukon frites or Cobb salad–no matter the mould, either New Money or Old– one thing is likely: your wealthy clients want to see that it lasts. As their advisor, the complexity of your job will depend on their goals; strategic paths won’t always be parallel, but the end game is usually the same–rich people want the cash to flow to the future.

“They want the money to be there four, five, six generations down the road,” says Tim Cestnick, managing director of WaterStreet Family Wealth Counsel in Burlington, Ont. Moreover, he adds, they’re willing to do what it takes to make sure that happens.

Laypersons often use the stereotypes of “New” or “Old” Money to tag the affluent. Even those with scads of cash might toss about the colloquialism in High Society to distinguish those who build from those who inherit. But advisors don’t necessarily break it down that way. Unlike our southern sister where oodles of Old-Guard family names roll off the tongue, Canada doesn’t present the same heritable padding with which to line your books.

That said, in her new book, Who Owns Canada Now: Old Money, New Money and the Future of Canadian Business [Harper- Collins Publishers Ltd., 2008], author, journalist and National Post Editor-at-Large Diane Francis says today’s family fortunes are controlled by 75 Canadian billionaires. And while their names may not all resonate, these business proprietors “are also comfortable internationally and network as much outside Canada’s borders as within them,” Francis writes. “They are sought out–and pursued–by brokers and investors from around the world. Their companies and markets are prey to foreign competitors or acquisitors. Their assets are located everywhere, as are their customers, and their stocks are listed on foreign exchanges. They think globally, not just locally.”

For most advisors dealing with the ultra-high-net-worth, every form of wealth is invaluable. To manage it requires surefooted financial finesse to preserve the capital, and prime it for posterity. But some clients will need more shepherding than others, depending on their goals.

To keep things straight, we’ll still use the terms new and old wealth to help highlight some of the subtle differences that exist between high-net-worth clients particularly concerning variances in values. The main distinction, says Beat Meier, director and senior client advisor with UBS Wealth Management in Calgary, is that old money is wealth held by families who created it many generations ago (at least three), while new money is entrepreneurially derived and typically comprises fortunes held by individuals who amassed wealth within their own or their parents’ lifetimes.

Most experts who deal with the former will attest continued growth and passage of that wealth to future generations is key. Patricia Lovett-Reid, senior vice-president, TD Waterhouse, says new-wealth entrepreneurs tend to view their capital as a stream–the source of which can be replenished. By contrast, old-wealth individuals think of money “like a pool that could be depleted.”

Risk tolerance is the main differentiator. Old-wealth people tend to be more conservative, notes Cynthia Kett, a CFP and principal of Toronto-based, adviceonly firm Stewart & Kett Financial Advisors Inc. “Either they choose not to work or want to preserve capital for the next generation, so they tend to take fewer risks.”

Liquid Drain-o

Owners of new wealth sport higher risk appetites. Many of Meier’s Calgary clients generated their capital in the oil and gas markets, minerals, or other resourcerelated businesses. “They’re mostly entrepreneurs and executives who know how to manage through periods of high volatility. They have been through troughs and peaks,” says Meier.

Senior financial planner Frank Danielson, with Assante Wealth Management, serves two wealth segments in the Vancouver market: medical professionals and entrepreneurs. Though both groups tend to be legacy-oriented, the difference between the niches, he explains, is in the mass liquidity events that happen when they sell their businesses.

While the professional surgeon tends to be a high-income earner, accumulating, saving and becoming affluent over time, the entrepreneur builds until he’s ready to cash in the crop. Such a selloff can easily catapult them to spending heights yet unseen–the sudden impact of which may also lead to indifference toward the future of their capital, so long as they have it through their lifetimes.

After all, the assets came from their own ingenuity, so they come to believe that if they dip in, no problem; the formula can easily be repeated. Meier says many of his new-wealth western clients simply start over after draining the initial swill. They may build a company to half its potential before selling out to a bigger company, and then move on to the next build. Or they may be determined to go all the way–“till the company’s a multibillion-dollar company.”

“With oil and gas, all you have to do is get management together, go out and buy some potential, or land, and start it all over again. That’s how it happens here,” Meier explains.

And with such intrepidity, “why shouldn’t they go hog wild” is often the accompanying attitude.

Unclogging

Such business-building acumen doesn’t mean these new-wealth entrepreneurs will follow through with equal spendingand- saving prowess. True, says Lovett- Reid: “Millionaire business owners who’ve sold [their businesses] may not be as savvy in personal finance, investments, trusts and tax. What they are really savvy at is making money.”

But they need help keeping it. Some of Danielson’s business-owner clients may be used to living an average lifestyle, having never before experienced this type of windfall. If all of a sudden they have the financial means to live large, they may not have developed the appropriate values around money to make good financial decisions. It’s when they’re uncomfortable around cash that subconscious self-sabotage can hit in the form of wayward cash depletion.

Danielson has a client who, after selling off his shares in his built-from scratch technology business, suddenly found himself euphoric with a $15-million cash injection. The feeling, however, risked becoming more of a quick fix than a permanent panacea, after the client purchased $9 million in Vancouver real estate. A lavish waterfront home, as well as a lakeside recreational property, left him with just $6 million in liquid financial assets. The result? His cash-flow needs were totally unsustainable.

Such “lifestyle-oriented, spontaneous extroverts,” as Danielson categorizes this client, require a lot more coaching around their long-term financial plans, including working with the clients’ other bankers, helping to arrange their mortgages, buying their cars for them, and making cash-flow deposits every quarter to keep them on track.

In the case of this prime-property client, the trick to aligning the finances with his livelihood was to develop a prioritized action plan that would meet both short- and long-term targets. After some heavy-duty coaching in terms of the impact of various financial decisions, the advisor and the client set an independence objective of $10.5 million that would need to be reached by 2013. Basically, the client had three options: sustain another liquidity event, incur growth elsewhere, or downsize the house. They agreed on door number three “to get their financial plan back within the goalposts.”

Even Meier’s O&G clients with average net worths of $50 million-plus need help aligning assets–especially if they’re under the influence of a liquid shot and their risk-taking tendencies run rampant. Meier is often flummoxed to see client statements from other providers that show highly concentrated positions of junior stocks within their portfolios–for example, with a market cap between $10 million and $50 million.

He says that sometimes these clients are overly concentrated in certain asset classes without even realizing it. “That’s what their life was all the time–they invested in companies, sold them again, bought other ones, sold, and so forth … the concept of diversification is not yet 100% out there,” Meier explains.

So what’s his trick for this new investment breed? Say a client has assets relegated to a single concentrated position in his or her own private or public stock; he doesn’t want to sell the stock today, yet he needs some liquidity now. Meier offers add-on services such as monetization strategies whereby a loan facility stands against a single, liquid, highly traded stock position, and pays out cash for it. The arrangements can be used to provide cash (e.g. for a vacation property) or for reinvestment purposes.

Kett also develops plans to help clients curb out-of-the-ballpark spending. Whether dealing with new or old wealth, when doing cash-flow or retirement planning, she sets annual benchmarks to what the value of both investable assets and sustainable spending should be. Says Kett: “When we compare it on an annual basis, and see it’s out of line, we bring it to the client’s attention and say, ‘We’ve got some issues here and they need to be addressed.’ ”

Danielson notes you have to be comfortable working in that type of structural environment, ensuring you create plans that reflect appropriate client benchmarks while asking the right questions. Above all, make sure the client implements your plan. Danielson remarks: “[Clients] are quite time-starved and they want [advisors] to be action-oriented and proactive in making sure that all the moving parts land in the right place and in the right order.”

Generation Gap

Scott Hayman, CA, CFP, and executive vice-president of Northwood Stephens Private Counsel Inc. in Toronto, says it’s critical to understand a client’s precise goals, values, and generational makeup. He doesn’t segment his ultra-high-net-worth clients into new or old categories, but rather focuses on aligning differing family visions among the generations. “It’s no different if it’s old or new money; when I get down to managing it, once I’ve got through to ‘what do you want to do with it?’ the specifics will change because of the different sets of goals and objectives.”

Quite simply, both new- and old-money clients need guidance. And not only will values differ among generations, but they can also vary between the same generations within the sub-setors of new or old wealth. For example, Kett says a common trait among some of her new-money clients is the attitude: If we can do it, they can do it. “They think, ‘If we were able to create our own wealth and we’ve given our child the [educational] tools to do the same, we don’t have the need to pass along the money,’ ” says Kett. Once they’ve helped kids out with down payments on homes and the education’s done, children are expected to stand on their own two feet.

Old-wealth clients, rather, are more likely to pass down their inherited wealth to the next generation. “They feel they’ve been given the advantage by inheriting the wealth, and it’s their job to pass it on to their children,” says Kett. These folks can fall under one of two subsets of old wealth: Either they’re very knowledgeable about finance matters or they have enough wealth and they don’t need to take undue risk to live their chosen lifestyle. Others who inherit wealth may not have received the same financial education within their families; the wealth has always been there and they’ve never had to understand investments or risks. They look for easy solutions to money management, as a result.

But such solutions aren’t always a breeze. Kett notes the wealthier the client, the more opportunities and flexibility await for structuring portfolios, and things can become more complicated. Most wealthy clients don’t necessarily want to maximize their money but they do want to have reasonable returns for reasonable risk. How they define those terms is based on the individual. “We help to determine what types of asset classes would suit their conservative nature for investing. The old-money clients will usually have a discretionary money manager who’s handling that portfolio and they rely on us to monitor the performance for them,” says Kett.

Driving Decisions

Cestnick concurs setting governance models are especially important when dealing with old-money clients. “How does the family deal with conflict if they can’t agree on things? Much like a corporation, families need a very similar model with a board of directors and a management team.” Such a model outlines who’s going to make the crucial investment decisions; how much is to be distributed to each family member annually; how much is to be spent or saved; and determines the family’s basic approach to wealth.

He suggests advisors think of managing the wealth of an ultra-high-net-worth family as though it is a business. “These families are like institutions, that’s how big the wealth is. When you have a father and a mother who created the wealth, and they’re still alive, decision-making is easy. But what happens when they’re gone? Someone has to make the decisions around how this wealth is to be managed.”

Hayman’s family-governance approach to old money aims to dictate how that wealth is to be managed over a period of time–whether it’s to be handled in perpetuity or just for the duration of clients’ lives. Family meetings are conducted where ideals of values and vision are discussed among patriarchs, matriarchs, their children, grandchildren, even in-laws.

Sometimes, he says, it’s difficult to get people in the same boat to row in one direction. He fears one of his old-money clients will run out of capital before it hits the fourth generation. Part of the problem has to do with competing interests among family members.

Say a Generation X-er at the governance table has never worked a day in his life, yet the family treasure has essentially gone to support his lifestyle. His parents, however, work very hard to keep the legacy flowing. Without a governance model in place, to plan spending, saving, and generally smooth out family differences, that legacy won’t get anywhere. Says Cestnick: “When you have old wealth–third and fourth generations– if you haven’t by that time established a good governance model for the family, you’re dead in the water.”

Like Hayman, Cestnick looks at clients’ generational makeup. “When it comes to advising clients, we look at Generation One as being different than Generation Two, and onward. And it’s largely because of the values and the attitudes around money that those generations have,” Cestnick explains.

Indeed, it’s tough to force the Old Guard to stand erect in perpetuity if the family values aren’t in sync. “Shirtsleeves to shirtsleeves in three generations– it’s remarkable how true that really is,” says Cestnick. “Generation One makes it; Generation Two spends it; and Generation Three finishes it off.”

Old Hat

It’s sewing these sleeves together that will enable a legacy of success. “If the wealth makes it past Generation Three so that Generation Four has significant wealth to speak of, then that’s truly old money,” says Cestnick.

Danielson doesn’t see too much old money within his client base of Vancouver entrepreneurs and professionals. “When I think of old money, I think of places like Montreal where you’ve got 20 or 30 families where the wealth has transcended five generations, and they still have some money left,” he says. Old-money clients tend to be more private than their showier new-money counterparts–but Danielson believes that all depends on their “Financial DNA”.

From a cultural perspective, he has observed a few of his old-wealth clients who recently moved to the Vancouver area after several generations of living in Eastern Canada. They gravitated toward the Shaughnessy residential area of the city, with its “majestic tree-lined streets and classic architecture.” Same goes for one of his clients who decided to emigrate to Vancouver from London, England. Coming from Old Money, Danielson says this client circumvented the more popular areas of wealth, say, in and around West Vancouver or Point Grey, opting for the old-world charm of South Vancouver with its large mature lots, 100-year-old trees, and opulent 1920s-style homes. “Definitely more heritage-like and traditional in terms of the look and the feel; you’re not going to see a post-modern classic of steel and concrete with all window glass in Shaughnessy,” he says.

Cestnick suggests the greatest distinction when it comes to old-money values is that first-generation wealth owners never forget the value of a dollar: “They remember what it was like when they had little; they understand how hard it is to make it, they don’t want to lose it.”

It’s getting the subsequent generations to buy in to the same mindset that can pose a challenge. “As much as first-generation parents don’t want it to change, it’s really hard to keep a second generation with the same outlook and view of wealth as their parents who created it,” says Cestnick.

That’s where good parenting skills come in. Cestnick says that attitudes toward wealth and money often change, and will be different from Generation One, Two and onward. Trying to get parents in Generation One to engrain healthy money values in their children can also present a moral money conundrum–especially if that message is belied by the parents’ own behaviour.

If the former can easily afford to buy a private jet, or a home in Italy, what does that say to their offspring about spending? “They grew up with the silver spoon,” says Cestnick. “It’s hard for them to imagine life without those things. So it’s hard for those generations to place the same value, or recognize the difficulty of acquiring those things as the first generation did.”

Lovett-Reid says she hopes that the second generation is taught some of the same financial discipline and values. “As generational lines get longer, the financial discipline could wane–unless the families develop ways that are unique to their family to reinforce it,” she explains, noting it’s also critical for advisors to help foster that financial communication between those generations.

What’s Their DNA?

Unlike Hayman and Cestnick who demarcate money values based on generation, Danielson looks at what he calls their Financial DNA. Prior to their first meeting, he gets clients to fill out a profile that will highlight chief indicators of their money attitudes, their life purposes and goals. By looking at the types of cars they drive and whether they have club memberships, for example, Danielson says he can more easily provide advice. “When you understand someone’s financial DNA and their values it’s easy to project that out [in a plan]. It’s a huge part of our practice and it’s incredibly valuable to help accelerate your understanding of clients,” he explains.

Further, he says, it’s surprisingly accurate. For example, one client has $20 million and a modest lifestyle. He lives on about $6,000 a month, and a recent liquidity event hasn’t changed his lifestyle one iota. Based on his Financial DNA theory, Danielson would label this client as introverted and structured, as opposed to, say, his other client who had to forfeit the waterfront. “He’s a strategic thinker; cautious. He has a seven or eight-year-old car–‘The Millionaire Next Door,’ ” he says.

Hayman would simplify it as, “You either have it in you or you don’t.” And though he tries not to overlay his values and money morals onto the client’s, sometimes it can be a challenge when a client’s values differ sharply from his own. What he doesn’t understand is when people inherit older money, they didn’t have a hand in making it, they have no qualms about spending it, yet they contest the vision tied to it.

“It’s no different than people who don’t vote but are the first in line to complain,” says Hayman. “You’re sharing in the fruits of someone else’s labour simply because you guys have the same name; there’s a reason that things were done a certain way.”

He feels younger generations should be allowed a place at the table to discuss how the wealth is dealt with, but at the end of the day, they need to fall in line with the governance model that’s been decided on. “[As an advisor] you do have to talk to the differing generations, and it’s a give-and-take mentality, where we say, ‘If we want this wealth to last through the generations, then we need to find a system for talking about this money that’s going to work. Or else it will disappear.’ ”

How to Grow “Old”

Cestnick says that while most of his entrepreneurial clients tend to want to leave a legacy, there will be more of a challenge turning that new money into old. After all, with only a few families in Canada that could be considered truly old wealth, it’s obviously a tough thing to amass. Even Cestnick has just a handful of them. “There are probably 30 to 50 families in Canada with old wealth that has gone for four or five generations in any significant way,” he says.

But he sees the figure doubling in another 20 or 30 years, simply “because we’ve created more millionaires in the last 20 years than in the last 50 years prior to that.”–a factor he says that is largely attributable to the technology and oil industries in Canada.

But if you only have a measly $20 million, good luck becoming another Thompson or Richardson. “In my mind, if you don’t have close to $100 million or more, the new money’s not likely to become old money in any significant way,” says Cestnick.

“If you only have $20 million, you’re probably doing what most Canadians do, and that is when you pass away you’re leaving an equal share to all your kids, and they can do whatever they want with it because it’s not going to go on for four or five generations.”

The only exception to that is if those millionaire parents happened to have really entrepreneurial kids who turned that seed money into generation-transcending wealth. But Cestnick says such things are rare.

Looking ahead, he acknowledges there will be a growing number of new-wealth people who will become concerned about leaving legacies because they’ve learned wealth comes at a cost. Some of those are psychological costs, such as not wanting to work or not knowing who true friends are, and the general challenges that come with having money. As a result, many of the wealthiest families have decided to cap how much they’re going to give to their kids or grandkids. “That’s not uncommon at all,” he explains.

“They want to leave them enough that they can do what they want, but they don’t want to leave them so much that they choose to do nothing.”